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June 20, 2013

Hoping to speed traffic through an increasingly congested Internet, several big Web companies including Google Inc., Microsoft Corp. and Facebook Inc. are paying major broadband providers for connections to get faster and smoother access to their networks, say people familiar with the matter.

Netflix Inc., though, has held out-so far. For a year it has been trying to directly connect specialized technology to the networks of broadband providers as a way to improve the quality of its video streaming, avoiding the stops and sputters common to Web video. But some of the biggest U.S. cable and phone companies have asked Netflix to pay for that access. People close to the company say it doesn't want to set a precedent for itself, although it is in talks with broadband providers about compromise solutions. At the heart of the debate is an increasingly pressing question: Who is responsible for the Internet's growing costs?

The payments, so far, aren't huge. Comcast Corp., for instance, says it earns about $25 million to $30 million a year for such payments, less than 0.1% of its total revenue. Time Warner Cable Inc. generates tens of millions of dollars, network executives said. Executives at both companies say they aren't looking to turn this revenue into a big business. These kinds of payments long have been shrouded in secrecy, largely because the companies involved are wary of discussing unregulated territory where contract negotiations can be contentious. Microsoft, Facebook, Google, Verizon Communications Inc., AT&T Inc. and Comcast declined to comment on the specifics of such arrangements.

Sensitivity aside, paying for these direct connections is legal. The practice doesn't breach the Federal Communications Commission's "open Internet" rules-enforcing the concept popularly known as "net neutrality"-which forbids landline broadband providers from favoring certain Internet traffic on their networks. The rules address traffic traveling over a providers' "last mile" pipeline into consumer homes. But these payments are for a direct connection between content companies' networks and the edge of broadband access networks. The rules are more ambiguous about such payments. Nevertheless, they have raised concerns among Internet executives that smaller startups could be put at a disadvantage.

If broadband access providers require payment from Web publishers, the FCC warned in a court filing last fall, it will "increase barriers to entry of new services and would make it more difficult to attract the necessary financing for startup Internet ventures. The next Google or Facebook might never begin," the commission said in the filing, responding to a pending Verizon lawsuit that challenges the regulator's "open Internet" rules. Some Web companies feel they have little choice, people close to the companies say. If Microsoft stopped paying Comcast "tomorrow," said a person familiar with the matter, its Web performance would "go downhill and the pages wouldn't load as fast." Google's decision came down to whether the Internet giant would put advertising revenue amounting to "tens of billions at risk" for the "millions" Google would have to pay Comcast, some of the people said. The debate is likely to intensify as more companies plan online video services. Intel Corp., for example, has been pursuing media deals in hopes of offering a streaming package of live channels and on-demand programs to customers in a product by the end of this year.

In January, Time Warner Cable publicly criticized Netflix for requesting "unprecedented preferential treatment." This week, Time Warner Cable said it is engaged with Netflix and seeks "an optimal solution" for their mutual customers. Comcast in recent months complained to the FCC that Netflix was asking for special access to its broadband network, people familiar with the matter said. Comcast said the issue could cause a financial dispute but didn't require regulators' involvement. Netflix responded to the FCC that it wasn't seeking special treatment and was being pressured by big operators with market power to pay for mutually beneficial, improved delivery of its content. Broadband providers "see these content guys who are minting money," said Daniel Golding, an Internet engineering consultant and former negotiator for AOL Inc. It is a question of "who should be paying for their fair share of this?"

Historically, the companies controlling the Internet's pipelines have made the investment. Much of the Web's backbone belongs to Internet middlemen, telecom companies like Cogent Communications, which help connect websites with cable and phone companies. Web publishers have always paid middlemen to help carry their traffic. Middlemen connected with big broadband providers on terms that have evolved over time. The historical idea was that networks exchanging roughly equal amounts of traffic would interconnect for free. But as the Web has evolved from a predominantly text platform to one where video, games and music dominate, those business arrangements have been strained. People close to Web content companies caution that free traffic swapping agreements for them are still more common than these paid arrangements with broadband access providers. A Microsoft spokeswoman said "the majority of our traffic occurs through free peering arrangements" and that it pays for such connections "on a limited basis...where options are limited."

The volume of Internet video content is expected to more than double by 2017, according to network-gear giant Cisco Systems Inc., adding more stress to broadband providers' networks extending to consumers' homes, which are costly to upgrade. Comcast's Internet traffic is growing at a compounded annual rate of 55%, according to its chief network officer, John Schanz. That means the company is having to double its network's capacity every 18 to 24 months. This has prompted broadband providers to start charging some middlemen in exchange for taking their traffic, according to several people familiar with their negotiations. In 2010, for instance, Level 3 Communications revealed a dispute with Comcast over data-heavy Netflix traffic that forced the company to buy backbone Internet service from Comcast, which Level 3 said it did "not need or want to purchase." More than two years later, a Level 3 spokesman said the two sides haven't yet resolved that dispute.

Meanwhile, big Web companies like Google and Facebook in recent years have invested heavily in building their own specially-designed infrastructure, extending to the edge of broadband providers' networks, to speed the passage of their content across the Internet. By paying Internet access providers, they can establish a direct connection into the providers' networks. Once inside the broadband providers' networks, however, all content faces the same traffic travails along the last miles of pipe connected to homes. Network executives on both sides say that the continuing presence of middlemen acts as a check on big cable and phone companies' ability to raise prices too aggressively. The executives also say that the access providers are offering reasonable rates, sometimes cheaper than the rates they would get from a third-party transit provider.

There's a "tremendous" opportunity today for any Internet startup to find different ways to send its traffic, said Comcast's Mr. Schanz. Still, some content owners worry that direct payments to broadband-access providers will eventually become their most viable option to get data-heavy traffic to consumers with the speeds and quality they expect. Internet traffic that doesn't go over those direct connections "is really what I would call a poor man's backbone, and you get what you pay for," said Lane Patterson, chief technology officer at network data center operator Equinix Inc. Already, some access links connecting the middlemen into big broadband providers' networks are getting clogged, network engineers say. Cogent, for instance, says it has been seeing congestion on its links with Time Warner Cable, Comcast and Verizon. Operators "do upgrade" for more capacity, "but they do it at a very procrastinated manner," Cogent's chief executive, Dave Schaeffer, said. Cogent says it doesn't pay broadband companies to connect with their networks.

Broadband provider executives said the bottom line is that if a network wants to dump a lot of traffic into their networks, it needs to start paying-whether it's a content company or a middleman. "Some content senders have been known to fabricate crises to try to shift costs of their business models to others," one executive said. "There is no win and it makes no sense for us to ever deliberately congest our network when we are in the business to provide Internet service to our customers," said Comcast's Mr. Schanz. Wall Street Journal

Netflix Inc.'s impasse with cable operators was sparked by its request to put its own servers directly inside their data centers. It was a proposition that makes big cable firms uncomfortable, executives and analysts say, because it could open the prospect of other content companies asking for the same thing. The streaming video service has reached deals to directly connect its specialized technology-which it is offering free of charge-with hundreds of providers around the world. These include smaller U.S. operators like Google Fiber, Cablevision Systems Corp. and Cox Communications Inc. But it hasn't come to any agreement with the biggest U.S. companies in the industry-Comcast Corp., Time Warner Cable Inc. AT&T Inc. or Verizon Communications Inc., which between them controlled 62% of the nation's broadband marketplace at the end of 2012, according to SNL Kagan data. Netflix has tried to pressure operators by offering certain data-rich "Super HD" and 3-D video only to customers whose providers have signed onto Netflix's plan. It also has launched a sleek, consumer-friendly website in recent months that ranks Internet service providers based on their Netflix users' average streaming speeds. Not surprisingly, providers that let Netflix's servers inside their networks usually appear at the top of the list. Wall Street Journal